We started following ACLS on January 8 this year (see our post archive here) because it is an undervalued asset play with an activist investor, Sterling Capital Management, holding 10.7% of its outstanding stock. ACLS has completed the sale of its 50% interest in SEN Corporation, its joint venture with Sumitomo Heavy Industries, Ltd. (SHI) to SHI for proceeds of $122.3 million. ACLS received around $35.9M in cash after applying $86.4M of the proceeds to meet obligations to the holders of the company’s 4.25% Convertible Senior Subordinated Notes, upon which ACLS defaulted in January. We last estimated ACLS’s liquidation value at around $147M or $1.43 per share based on our reconstruction of the balance sheet following the sale. We’ve now had an opportunity to review the actual balance sheet and reduced our estimate to $117.8M or $1.14 per share, which is more than 170% higher than its close yesterday of $0.42.
The value proposition updated
During the three months ended March 31, 2009, ACLS continued to burn cash in its operations, which it attributes to the depressed semiconductor equipment market and the resultant decline in revenues. Cash and cash equivalents at March 31, 2009 were $71.2M, compared to $37.7M at December 31, 2008. The $33.5M increase in cash and cash equivalents was primarily attributable to the net cash proceeds from the sale of its investment in SEN, offset by cash used in operations. Set out below is our adjusted balance sheet for ACLS (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):
ACLS has made substantial operating losses over the last two years, and it is likely to be continue to do so. While its liquidation value of around $117.8M or $1.14 per share is more than 170% higher than its close yesterday of $0.42, it is likely to deteriorate while it continues its operating losses. ACLS has been our problem child, and we don’t think there is any good news on the horizon near-term, but we find it difficult to exit the position while it’s trading at a such a large discount to its (albeit deteriorating) liquidation value. Accordingly, we’re going to hold on for the moment, and see how the position plays out. If we get an opportunity to exit at close to value, however, we’ll take it.
Full Disclosure: We have a holding in ACLS. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.